Inside the math shaping NYC’s rent regulation fight

“The real crisis is the affordability crisis,” John Banks, REBNY president (Credit: iStock)

In the lobby of a pre-war building in Manhattan Valley, Rhea Vogel tells the camera crew she’s worried. She inherited 938 and 940 Amsterdam Avenue from her late father, a Holocaust survivor. But there are looming changes to the state’s rent control laws she claims will put her in the red.

“I’m not sure how long I can hold onto these buildings and still do right by my tenants,” she says.

In another video, Reshit Gjonvic, who owns a six-unit apartment building at 610 67th Street in Bay Ridge, says he has to work two other jobs to cover the high costs of maintaining the property. He says the proposed changes by Albany lawmakers would mean losing the building.

“Ultimately, the people who suffer are the tenants,” Vogel told The Real Deal in an interview.

The videos are part of “Responsible Rent Reform,” a campaign launched by the Real Estate Board of New York’s PAC, Taxpayers for an Affordable New York. The campaign comes as the Rent Guidelines Board gears up for its annual vote on whether to increase rents on regulated properties. The stakes this year, of course, are much higher than previous years because come June, there could also be a raft of major changes to state rent-regulation laws, including the elimination of programs that allow landlords to increase rents by renovating their buildings and an up to 20 percent rent boost applied to units when they are vacated.

In February, REBNY indicated that it would approach elected officials “armed with statistics and data.” To better understand the lobbying group’s stance on proposals coming out of Albany, TRD took a closer look at these stats.

According to an analysis by REBNY and HR&A Advisors, provided as a supplement to a fact sheet on the campaign’s website, net operating income in rent-regulated buildings constructed before 1947 in the Bronx and Brooklyn will drop 20 to 30 percent within the first five years of these policies being eliminated. For properties built post-1947 in Queens, NOI would drop 10 to 20 percent within that same timeframe.

The REBNY report makes a few key assumptions. One is that tenants are staying in these units an average of 12.8 years — meaning that the vacancy bonus received would be the full 20 percent. The examples provided in the report apply both a vacancy bonus and rent increases included through major capital improvements (MCIs). The report doesn’t calculate the potential impact of individual apartment improvements (IAIs) on NOIs. For each building type, the analysis assumes that the landlord won’t go above the rent rates in the area — so, it’s assuming that preferential rent rates are being used in that five-year period.

The predicted drops in NOIs are based on the pace of rent increases approved by the Rent Guidelines Board since 1999. According to the report, since expenses have outpaced RGB increases in that timeframe, the elimination of MCIs, IAIs and other programs will mean that landlords will lose a significant chunk of their revenue.

In another report released earlier this month, the RGB noted that revenues exceed operating costs in nearly all stabilized buildings — 5 percent of such properties are considered distressed because costs exceed gross incomes. The report also notes that the cost-to-income ratio for rent stabilized buildings in the city was 59.3 percent — so, 59.3 cents of ever dollar in revenue was spent on operating and maintenance costs.

The report states that NOI increased .4 percent from 2016 to 2017, marking the 13th consecutive year that landlords saw an uptick. (Though in the same report, the board provided a conflicting analysis that showed a 5 percent decline in NOI in 2017, as first reported by PincusCo).

The two landlords featured in REBNY’s ads don’t seem to exactly reflect the findings in its own report. The report estimates that landlords of rent-regulated buildings in the outer boroughs — Manhattan properties are excluded in its analysis — are making payments on 30-year mortgages, of which $50,000 or so is being spent per unit to make repairs. Vogel, a Manhattan landlord, said she last received approval for major capital improvement a decade ago for electrical and window work at her buildings. Property records show that she secured a $350,000 loan in 2005. The only recorded debt at Gjovic’s building was for an acquisition loan in 1997 for $178,125. Gjonvic declined to comment.

Other financial information for the landlords was not available. A REBNY representative noted that its report is meant to reflect the potential consequences of various proposals to the more than 414,000 units. These consequences, according to the report, include “heating outages, vermin infestations, mold and other housing quality issues” that will arise if landlords don’t have sufficient revenue streams.

The report doesn’t factor in cases where renovations aren’t actually completed. Over the years, the MCI and IAI programs have drawn criticism for, in some cases, incentivizing landlords to inflate the costs of renovations in order to raise rents. For IAIs, the state’s housing regulator, the Division of Homes and Community Renewal, doesn’t require landlords to provide receipts for work performed to secure rent increases.

“None of this takes into account that the real estate industry has been illegally deregulating apartments across the city through overcharges in MCIs evictions of families, illegal pressure and harassment campaigns that landlords have run against tenants,” said Jonathan Westin, director of the tenant advocacy group New York Communities for Change.

REBNY pointed to a report released by the Regional Plan Association last year, which found that less than 2 percent of residential units in the city are managed by “bad landlords.”

“The real crisis is the affordability crisis, yet the proposals we’ve seen so far do nothing to ease vacancy rates, make apartments more affordable, create a single new affordable unit, or address tough enforcement on bad actors,” John Banks, REBNY president, said in a statement. “Instead they will put more than 400,000 rent stabilized units at risk of financial distress, harm living conditions for tenants and reduce the city’s property tax collections.”

Justin La Mort, supervising attorney for Mobilization for Justice, noted that changes proposed in Albany should spark a serious conversation about how much landlords should be pocketing after expenses. He said perhaps many of these landlords are over-leveraged, banking on deregulation of their units.

“If you were taking in a lot of loans with the expectation that you were going to be able to make a lot of money on this building over a short amount of time, and usually that’s done through what we call predatory equity by getting tenants out faster than would naturally happen, and then [if] that doesn’t happen, I don’t think as a public policy we should feel bad for that,” he said. “You took a risk, you decided through either legal or illegal means that you were going to get rent regulated tenants out, and you failed to do so.”